- Zillow's Chief Economist, Skylar Olsen, advises against home flipping due to high mortgage rates.
- Instead, Olsen recommends a long-term, buy-and-hold strategy.
- She favors cities with solid economic prospects or affordable properties.
Zillow's Chief Economist Skylar Olsen is still bearish on home flipping as a successful strategy in today's market.
In an interview with Business Insider earlier this month, Olsen reiterated her call from March 2023 that short-term, real-estate investing strategies remain risky in the current environment with mortgage rates elevated and home-price growth lackluster.
"Don't do strategies that depend on short hold periods," Olsen said. "It wasn't a big deal when mortgage rates were down at 3% and home values were growing like crazy. Flipping was easy. With those two things flipped, flipping is not an easy strategy."
Rates on 30-year fixed mortgages are still near 7%, according to data from Freddie Mac. That's more than double where they were in the middle of 2021.
Meanwhile, home-price growth has cooled compared to the period from 2020-2022. According to Zillow data, US home values are up 3.6% year-over-year from February 2023 to February 2024. From February 2021 to February 2022, by comparison, home values were up 16.3%.
Olsen said high mortgage rates are a major barrier to successful home flipping. One reason for this is that when mortgage rates are high, it cuts into profit margins on a deal, especially in combination with closing costs. In other words, the higher monthly cost of borrowing money to own a home while you fix it up and look to resell it takes away from the overall profit you would make after selling.
Another reason for this is the negative impact higher mortgage rates have on home price growth, also cutting into profits. Elevated mortgage rates mean people can afford to dedicate less of their monthly budget to building up equity in their homes, muting price growth. When price growth is slow, it can mean capturing less appreciation on a flip during the time it takes to update the property.
"If I'm only going to hold onto this home for a short period of time, the return I'm going to get on this home better be worth those upfront costs of purchasing it in the first place," Olsen said.
2 ways to approach investing instead
Instead of flipping, Olsen said it's better to take a long-term, buy-and-hold approach.
She said investors can benefit from this strategy in two ways. The first is to buy properties in cities that have solid economic prospects.
"Seek out investments in areas that have good legs or have long-run prospects. I always like to look at job growth for that kind of thing," she said. "If we think about job growth since pre-pandemic and we rank that, you'll kind of see the stars of the pandemic headlines."
She said some of these cities include Austin, Texas; Nashville, Tennessee; Dallas, Texas; Tampa, Florida; Las Vegas, Nevada; San Antonio, Texas; Charlotte, North Carolina; Sacramento, California; Atlanta, Georgia; Phoenix, Arizona; and Miami, Florida.
In addition to having good job growth, home prices in many of these cities have come down significantly over the last couple of years, signaling a buying opportunity, Olsen said.
Second, Olsen said more affordable properties around the country — and therefore more affordable metropolitan areas — are good places to invest. This is because housing is just about the least affordable it's been since the 1980s, meaning demand for inexpensive housing will remain strong.
"Because we have such affordability challenge, I think you could expect that kind of investment — that's going to most certainly be a place that appreciates into the future," Olsen said about cheaper housing stock.
Some cities that fit the bill on this front, either on an absolute or relative basis, include: Pittsburgh, Pennsylvania; Hartford, Connecticut; Providence, Rhode Island; Chicago, Illinois; Cleveland, Ohio; Columbus, Ohio; Cincinnati, Ohio; and Milwaukee, Wisconsin.
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